The possibility of what a donation can be is somewhat limitless. You can donate your time, property, money or advice.
Typically, a donation is a gift that requests nothing in return. Within this general definition lies a more specific category of charitable donations. These donations can vary from cars, boats and real estate to clothes, cash and stocks. Essentially, a charitable donation can be anything that a chosen organization needs in order to either fund their endeavors or use directly to benefit their programs.
For many years, charitable donations could not be deducted from an individual’s taxes. Once the charitable deduction tax was introduced in the early part of the last century, these donations could be used to benefit the donor financially. However, there are rules and restrictions that exist alongside these benefits. Some organizations are not eligible to receive these donations and some donations are not all eligible to be deducted.
Donations can benefit you financially in a number of ways. When you deduct a qualified charitable donation, you can use the deduction to offset your adjusted gross income and receive a tax break. In most cases, you can claim 50 percent of your adjusted gross income in qualified charitable donations. Depending on the donated item, this limit can be lowered to 20 or 30 percent. It is useful to note that you can roll any excessive donations into future years to be used in another tax return. Charitable deductions can only be taken if the donor qualifies for an itemized deduction instead of the standard deduction when filing his or her taxes.
A charitable remainder trust or a charitable gift annuity can be used to provide an income for the donor while securing a future donation to a qualified organization. Assets or cash are paid into a fund, which then pays an income to the donor. The initial investments come with certain tax breaks that can benefit the donor during his or her lifetime. When the donor dies, the remaining assets are donated to a charity.
Retirement funds can also be used to donate money to qualified organizations. However, the participant of the plan must be older than 70-and-a-half years of age and the distribution he or she withdraws must be donated in full. While the donations cannot be used as tax deductions, they are not subject to income tax. Therefore, for those wanting to donate to a qualified charity should do so in full, from their distributions, to avoid paying unnecessary tax themselves.
There are two types of eligible donations that a donor can give to a qualified organization. Donors can furnish cash donations or item donations. The donation of your time or services cannot be claimed. Additional restrictions apply to both cash and property donations, regardless of their initial eligibility. All donations under the value of $250 (both cash and noncash) need to be filed with a record of the transaction listing the organization’s name, date of donation and the amount. Further documentation may be required depending on the type of donation and the amount donated.
A cash donation can be made by check, credit card, payroll, cash or other methods similar to these. Documentation must be provided for all contributions. Additional documentation is applicable for donations over $250. If you have donated a series of smaller amounts each totaling less than $250, then they stand alone as individual donations.
Donations of property adhere to slightly stricter rules. A donor must determine the fair market value of an item in order to deduct the value from his or her taxes. Items that are valued over $5,000 must be appraised for their value by a qualified appraiser and specific documentation must be included in your tax return. The criteria for donating an item rely on the type of object or property that is donated.
Capital gains tax is often waived when donating stock to a qualified charity. Therefore, if you are in a higher tax bracket, then you will spend less money donating the stock as is, rather than selling the stock, paying the capital gains tax and then donating the proceeds.
Vehicles can be donated to an organization and later deducted from your taxes. However, you must deduct either the total proceeds of the vehicle when sold or the fair market value of the vehicle, whichever is lower. Household items and used clothing must be in good or better condition to qualify. Items valued at over $500 can be in worse condition but must be appraised by a qualified appraiser.
There are factors that may result in your donation not being tax deductible, depending on the circumstances and type of donation you are claiming. You cannot deduct your time or services to a qualified charity, nor can you deduct your personal expenses.
Appraisal fees are generally not tax-deductible as a charitable donation. However, some fees are allowed to be filed under miscellaneous expenses. Raffles or lottery tickets are not allowed to be deducted, as well as donations that you receive a benefit from. You can deduct the difference in cost between the value of the benefit you received and the cost of the donation. An example of this is a charity dinner. The value of the meal or other benefits you received must be subtracted from the ticket price before you file the deduction.
Timing is also key when making a tax-deductible charitable donation. All donations must be made in the year that you are filing your taxes. The delivery date of the donation is the recorded donation date, not the date you initiate a donation.
Documentation needs to be provided in full for each donation over $250, cash or noncash. IRS forms, appraisal forms, receipts and written confirmations from qualified charities are all examples of documentation. If these items are not included, then the deduction cannot be taken.
Regardless of whether you donate cash or property, the organization receiving the donation must be qualified. Qualified organizations are deemed so by the IRS and adhere to certain tax code rules. Not all 501(c)(3) charities are qualified and not all organizations without a 501(c)(3) status are disqualified. The following categories are eligible to receive tax-deductible donations if they are also qualified under section 170(c) of the tax code.
If you are looking to donate cash or property to an organization and wanting to deduct the amount on your taxes, then make sure you ask the charity if they are qualified before you donate.